The effect of VAT on the car market in the UAE

The introduction of VAT in the UAE has been the most buzzing topic of conversation recently, coming into effect starting from the 1st of January 2018 at a standard the rate of 5%.

How will this affect the car industry in 2018?

VAT will directly affect the prices of new cars as the 5% tax will be added to the transaction price of car purchases. In the case of used cars, VAT will not apply to private sales, i.e. from a private owner to another end user. As for registered used car dealers, VAT will be applied to the profit margin of any sale transaction. It’s expected that the demand for used cars would witness increased interest in the first months of the year as potential buyers look to save.

How has this affected car sales recently?

According to sources in the local industry, cars sales have been generally slow in 2017 compared to 2016. This contributed to a stock surplus of new and pre-owned vehicles. However, there has been a boost in car sales in the UAE recently since the VAT announcement as car dealers are keen to sell as many cars as possible before the January 1 deadline. In addition, dealers have been busy with attractive sales campaigns to help move their 2017 models and pre-owned cars before the start of 2018.

Will VAT for a new car be the same amount as a pre-owned one?

VAT will be charged at the standard rate of 5% on most goods and services sold across the UAE. In the case of cars, the 5% will apply to new cars sold by dealers to end users. However, the tax calculation on used cars will be based on the profit margin rather than the transaction price.

What other services will be affected by VAT?

As of 2018, fuel, insurance and vehicle maintenance such as parts and labor are to increase by 5%.

How will VAT be calculated?

A margin scheme is expected to be used to avoid tax on tax, under this scheme the VAT is calculated based on the profit of the transaction rather than the full sale value of the car itself.

Will VAT be included when importing a vehicle?

Import VAT will be included when a VAT-registered dealer imports vehicles. The import VAT must be paid in cash at the point of entry into the GCC before it’s distributed.

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